Bernanke Makes Case for Further Stimulus to Help Jobless

Ben S. Bernanke, chairman of the U.S. Federal Reserve, left, arrives for an opening dinner and reception at an economic symposium sponsored by the Kansas City Federal Reserve Bank at the Jackson Lake Lodge in Moran, Wyoming, on Aug. 30, 2012. Photographer: Travis J. Garner/Bloomberg

Aug. 31 (Bloomberg) -- Federal Reserve Chairman Ben S.
Bernanke, lamenting the suffering caused by unemployment of more
than 8 percent and defending his unprecedented actions, made the
case for further monetary easing.

“The costs of nontraditional policies, when considered
carefully, appear manageable, implying that we should not rule
out the further use of such policies if economic conditions
warrant,” Bernanke said today in a speech to central bankers
and economists at an annual forum in Jackson Hole, Wyoming.

Bernanke, speaking two weeks before the next meeting of the
Federal Open Market Committee, emphasized that a new round of
bond purchases is an option. Stocks and Treasuries climbed and
the dollar weakened to a more than three-month low as investors
speculated steps to boost the economy may come as soon as next
month.

“The door is wide open to the Fed contemplating additional
action,” said Josh Feinman, a former Fed senior economist who
helps oversee $219 billion at Deutsche Bank AG’s asset
management unit in New York. “It reaffirms other messages sent
by the Fed that additional action is still very much on the
table. By the end of the year we’ll probably get both rate
guidance extension and more asset purchases.”

The Standard & Poor’s 500 Index advanced 0.5 percent to
1,406.58 at the close of trading in New York. The yield on the
10-year Treasury note fell to 1.55 percent from 1.62 percent
yesterday. The Dollar Index, which IntercontinentalExchange Inc.
uses to track the greenback against the currencies of six U.S.
trading partners, declined 0.55 percent to 81.245 after touching
80.964, the lowest level since May 14.

Waste of Talent

Bernanke said long periods of high unemployment produce
“enormous suffering and waste of human talent” and also risk
causing “structural damage on our economy that could last for
many years.”

His 24-page speech at the Kansas City Fed’s symposium
reviewed policy actions through the financial crisis and use of
tools such as communication and $2.3 trillion in outright bond
purchases, concluding that they have been effective in boosting
growth and improving financial conditions.

Bernanke cited studies that have shown they have been
“economically meaningful” and “significantly lowered long-term Treasury yields” and boosted stock prices.

The S&P 500 has climbed 11 percent this year through
yesterday. The yield on the benchmark 10-year Treasury has
fallen from a 2012 high of 2.38 percent in March.

Maximum Employment

Even so, “we have seen no net improvement in the
unemployment rate since January,” Bernanke said. “Unless the
economy begins to grow more quickly than it has recently, the
unemployment rate is likely to remain far above levels
consistent with maximum employment for some time.”

Bernanke concluded by repeating the FOMC’s last statement
that the central bank “will provide additional policy
accommodation as needed” to spur growth.

The central bank’s asset purchases have spurred criticism
from Republicans, including presidential candidate Mitt Romney
and House Speak John Boehner of Ohio. The 2012 Republican
platform calls for an audit of the Fed’s monetary policy.

The 58-year-old Fed chairman addressed some of the
arguments against more purchases. Among them: further buying of
Treasuries could disrupt the functioning of the debt market and
fuel inflation expectations and asset-price bubbles.

He said the expansion of the Fed’s balance sheet hasn’t
“materially affected inflation expectations” because of public
confidence in the Fed’s ability to unwind stimulus. Similarly,
“we have seen little evidence thus far of unsafe buildups of
risk or leverage,” he said, and in the bond markets, “trading
among private market participants remains robust.”

Meeting Minutes

Policy makers at their July 31-Aug. 1 meeting were moving
toward additional action, according to minutes released last
week. Many members of the panel said more stimulus will be
needed “fairly soon” unless the recovery shows signs of a
“substantial and sustainable strengthening.”

Central bankers considered extending the time horizon the
Fed expects to keep its benchmark interest rate low as well as
additional bond purchases, the minutes show. Since January, the
Fed has said economic conditions would likely warrant keeping
the rate “exceptionally low” through at least late 2014. The
rate has been kept close to zero since December 2008.

The steps are among the unorthodox policy tools wielded by
Bernanke, a 58-year-old former Princeton professor, as he sought
to pull the nation out of its worst recession since the Great
Depression and then to ensure a lasting recovery.

‘Economic Experiments’

Bernanke, a student of the Depression, has presided over
what the economist William White, a former member of the Bank
for International Settlements’ executive committee, calls “one
of the greatest economic experiments of all time.”

Three years into the expansion, Bernanke has tried to nudge
the economy onto a path of stronger growth to boost hiring. The
FOMC on June 20 extended a program, known as Operation Twist,
that replaces short-term notes in its portfolio with longer-term
assets in an effort to further suppress longer-term interest
rates.

The Fed chairman’s unprecedented use of the central bank’s
powers -- which also involved the rescue of Bear Stearns Cos.
and American International Group Inc. during the financial
crisis -- has become a contentious issue in an election year.

Romney told the Fox Business Network on Aug. 23 that he
wouldn’t reappoint Bernanke, raising questions about the
succession more than a year before Bernanke’s term expires in
January 2014.

‘Fair Game’

“Criticism is fair game, but this is like political
football,” said Mark Gertler, a New York University economist
and research collaborator with Bernanke. “Years from now,
people who will look back are going to thank God we had Bernanke
as chairman over this period and that he was able to keep the
focus on the job and conduct responsible monetary policy.”

Since the last FOMC meeting, data on housing, manufacturing
and retail sales have exceeded expectations, prompting some Fed
officials to cast doubt on the need for additional easing.

St. Louis Fed President James Bullard said in a Bloomberg
Television interview today that policy makers should wait for
more data before deciding on “big action.”

Still, the signs of strength in the economy may not be
enough to satisfy Fed policy makers whose mandate from Congress
requires them to aim for maximum employment and stable prices.

Chicago’s Charles Evans, San Francisco’s John Williams and
Boston’s Eric Rosengren have said that they favor “open-ended”
asset buying. Evans said in Hong Kong Aug. 27 that the FOMC
should begin a third round of purchases and keep buying until
unemployment falls for at least six months.

Growth Cools

Gross domestic product expanded at a 1.7 percent annual
rate in the second quarter, slowing from 4.1 percent in the
final three months of last year. Employers probably added
127,000 jobs in August, down from 163,000 a month before,
according to the median forecast in a Bloomberg News survey of
economists before the Sept. 7 Labor Department report.

Cooling growth leaves the world’s biggest economy more
vulnerable to fallout from the debt crisis in Europe and the so-called fiscal cliff in the U.S., the $600 billion of tax
increases and spending cuts that will take effect automatically
at the end of the year unless Congress acts.

Budget cuts at all levels of government have “become an
important headwind for the pace of economic growth,” Bernanke
said today. In addition, “a major source of financial strains
has been uncertainty about developments in Europe.”

Bernanke used the same forum in 2010 to signal a
willingness to take additional action. The following November,
the Fed decided to buy $600 billion of Treasuries through June
2011.